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Detroit bankruptcy trial begins

Nathan Bomey and Matt Helms
1:16 a.m. EDT September 3, 2014

A bankruptcy lawyer for Detroit said the lowest “range of reasonableness” for the prospective sale of the Detroit Institute of Arts is “zero or a number close to zero” because it’s not clear the art can be sold.(Photo: Romain Blanquart/Gannett Michigan)

The grand bargain to help resolve Detroit's bankruptcy offers a fair and lucrative resolution of the city-owned Detroit Institute of Arts, the city's top bankruptcy lawyer argued Tuesday.

Jones Day bankruptcy lawyer Bruce Bennett — offering opening statements in Detroit's historic bankruptcy trial — said the lowest "range of reasonableness" for the prospective sale of the DIA is "zero or a number close to zero" because it's not clear the art can be sold.

"The purpose is no less than to save the city of Detroit," Bennett said. "Detroit won't recover or survive if this isn't done."

The grand bargain would allow Detroit to accept the equivalent of $816 million over 20 years from nonprofit foundations, the state of Michigan and Detroit Institute of Arts donors — including the Detroit Three automakers — to help reduce pension cuts and transfer the DIA to a charitable trust. The deal, dubbed the grand bargain, includes $366 million in pledges from nonprofits such as the Kresge Foundation and the Ford Foundation.

But bond insurers Syncora and Financial Guaranty Insurance Co. are expected to argue during the trial that the grand bargain amounts to unfair discrimination against financial creditors. They say the DIA is worth billions of dollars.

"I'm not sure their views matter at all," Bennett said.

His remarks opened a trial that will determine the fate of Detroit's financial future, which rests on emergency manager Kevyn Orr's sweeping plan to slash more than $7 billion in liabilities and reinvest $1.4 billion over 10 years in services.

Bennett's opening arguments are expected to continue today, when creditors will get a chance to respond.

Bennett, the city's chief bankruptcy lawyer, argued U.S. Bankruptcy Judge Steven Rhodes should approve the plan of adjustment because it's critical to help improve the lives of ordinary Detroiters.

After the trial, which could extend as late as Oct. 17, Rhodes will decide whether the plan of adjustment is fair and feasible and can be implemented.

Bennett argued that the lack of clarity over whether the DIA's property can be sold — the museum has argued vigorously that it cannot — makes the grand bargain a reasonable settlement to the issue.

FGIC advisers last week procured an offer from New York-based Art Capital Group to lend the city $4 billion to help facilitate the city's exit from bankruptcy, with the DIA pledged as collateral on the loan.

But Bennett dismissed the prospect of the Art Capital loan, in part because, he said, the loan is so expensive it would require the city to sell art to pay the bill.

The DIA's future is tied directly to pensioners through a proposed settlement negotiated by Detroit bankruptcy mediators U.S. District Judge Gerald Rosen and attorney Eugene Driker. After months of fighting over potential cuts, several Detroit retiree groups agreed to support the DIA's spin-off in exchange for smaller cuts to their pensions.

General pensioners voted to accept 4.5 percent cuts to their checks, a reduction in annual cost-of-living-adjustment increases and a claw back in excessive annuity bonuses, while police and fire pensioners agreed to accept a reduction in cost-of-living-adjustment hikes.

Although the city argued in court filings that pensioners had to be protected from severe cuts, Rhodes reiterated Tuesday that he would not consider evidence illustrating how Detroit's bankruptcy plan will affect the personal finances of retirees.

Rhodes also said he would not allow details of secret mediation talks to be divulged as evidence during the trial, though he said he would address objections on information disclosures on a case-by-case basis.

Judge to weigh in on water shutoffs

Rhodes heard arguments Tuesday on a request to issue a restraining order to stop Detroit from shutting off water to customers for unpaid bills. Critics of the city's water department made the request.

Rhodes made no rulings before adjourning opening arguments in the trial.

The city stepped up shutoffs in March of those 60 days behind or owing more than $150. About 15,000 customers had service shut off in April-June. The city has faced international criticism for the shutoffs.